The Army is discontinuing a controversial multibillion-dollar deal with oil services giant Halliburton Co. to provide logistical support to U.S. troops worldwide, a decision that could cut deeply into the firm's dominance of government contracting in Iraq.
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The choice comes after several years of attacks from critics who saw the contract as a symbol of politically connected corporations profiteering on the war.
Under the deal, Halliburton had exclusive rights to provide the military with a wide range of work that included keeping soldiers around the world fed, sheltered and in communication with friends and family back home. Government audits turned up more than $1 billion in questionable costs. Whistle-blowers told how the company charged $45 per case of soda, double-billed on meals and allowed troops to bathe in contaminated water.
Halliburton officials have denied the allegations strenuously. Army officials yesterday defended the company's performance but also acknowledged that reliance on a single contractor left the government vulnerable. The Pentagon's new plan will split the work among three companies, to be chosen this fall, with a fourth firm hired to help monitor the performance of the other three. Halliburton will be eligible to bid on the work.
The decision on Halliburton comes as the U.S. contribution to Iraq's reconstruction begins to wane, reducing opportunities for U.S. companies after nearly four years of massive payouts to the private sector.
Of the more than $18 billion Congress allocated for reconstruction in late 2003, more than two-thirds has been spent and more than 90 percent has been contractually obligated, according to the inspector general's office overseeing reconstruction work. The rest of the money, which is collectively known as the Iraq Relief and Reconstruction Fund, needs to be obligated by the end of September.
Army spokesman Dave Foster said in a written response to questions that funding for 11 contracts covering various aspects of reconstruction -- including transportation, communications, water distribution and the electric grid -- will expire this fall. While the contractors will be allowed to finish any work previously requested, no new work can be ordered after September.
Among those contracts is another Halliburton deal, for up to $1.2 billion to restore oil services in southern Iraq. As with the others, it will not be extended.
"The Iraq reconstruction is winding down . . . so there is no need for new contracts to replace the existing," Foster said.
Instead, the Iraqi government will have to find its own contractors to do the work, which includes tackling a large number of projects left undone by the United States.
"This is the year of transition for Iraqi reconstruction. The U.S.-funded projects are being completed and transferred to Iraqi management and control," said James Mitchell, spokesman for the inspector general's office.
That office has repeatedly warned of a "reconstruction gap" between what the United States promised in rebuilding the country after the spring 2003 invasion and what it has delivered. For instance, a contract aimed at building 142 new health centers across Iraq instead produced 20 before the program ran out of money.
The heavy involvement of U.S. contractors in Iraq has been one of the defining features of the American presence there, with private companies called on for duties as varied as guarding supply convoys and analyzing intelligence.
No contractor has received more money as a result of the invasion of Iraq than Halliburton, whose former chief executive is Vice President Cheney.
The logistics work is performed through a subsidiary, Kellogg Brown & Root Services Inc. Last year, the Army paid the company more than $7 billion under the contract, according to a search of government contracting data by Eagle Eye Inc., a private consulting firm. The number this year is expected to be between $4 billion and $5 billion, according to Randy King, a program manager with the Army.
The company maintains that its billing disputes with Defense Department auditors have been resolved and that its work has received rave reviews from the military. "By all accounts, KBR's logistical achievements in support of the troops in Iraq, Kuwait and Afghanistan have been nothing short of amazing," said company spokeswoman Melissa Norcross in a statement.
King, the Army official, agreed yesterday. "Halliburton has done an outstanding job, under the circumstances," he said. He added that Pentagon leaders ultimately decided they did not want to have "all our eggs in one basket" because multiple contractors will give them better prices, more accountability and greater protection if one contractor fails to perform.
Halliburton initially won the contract in December 2001. At the time, the deal was relatively modest in size, but stubborn insurgencies in both Iraq and Afghanistan have stretched U.S. troops and kept Halliburton busy trying to meet their needs.
Known formally as the Logistics Civil Augmentation Program, or LOGCAP, the contract "has expanded beyond what anyone could have imagined," said Dov S. Zakheim, the Pentagon's comptroller from 2001 until 2004 and now a vice president at consulting firm Booz Allen Hamilton Inc. "The KBR people themselves would point out that the challenges they had coming out of Iraq, over and above everything else they had to do, were taxing their systems. You're really asking too much of one firm to be able to manage all of this."
The original contract included one base year with nine option years. The Army says it will not pick up the next option year and instead plans to put out a new request for proposal by the end of the month. It expects to announce winners in November.
The bidding on the new contract is likely to attract some high-profile suitors, including weapons makers Lockheed Martin Corp. and Northrop Grumman Corp.
"These are huge contracts. They are among the biggest government services contracts that have ever been created," said Loren Thompson, chief operating officer of the Lexington Institute, a defense research organization in Arlington. "Most of the big, integrated defense contractors recognize that new sales of military hardware are going to be hard to come by in the years ahead. There's a general migration to services. And no contract on the horizon is bigger in services than LOGCAP. It's just too big to ignore."
Rep. Henry A. Waxman (D-Calif.), a frequent Halliburton critic, said he would like to see even more companies included as winners in order to increase competition as work arises. But he welcomed the move away from the exclusive contract with Halliburton as a good first step. "When you have a single contractor, that company has the government over a barrel," Waxman said. "One needs multiple contractors in order to have real price competition. Real competition saves the taxpayer money."
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